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ON Semiconductor (ON): Company Profile, Stock Price, News, Rankings

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ON Semiconductor

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Good day and thank you for standing by. Welcome to the Onsemi Fourth Quarter twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Parag Agarwal, Vice President of Corporate Development and Investor Relations. Please go ahead.

Thank you, Kevin. Good morning and thank you for joining Al Sami's fourth quarter and full year twenty twenty four results conference call. I'm joined today by Hassan Elkharic, our President and CEO and Thad Tran, our CFO. This call is being webcast on the Investor Relations section of our website at www.armsstanding.com. A replay of this webcast along with our fourth quarter and full year twenty twenty four earnings release will be available on our website approximately one hour following this conference call and the recorded website will be available for approximately thirty days following this conference call.

Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation include certain non GAAP financial measures. Reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain limitations when using non GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections.

Important factors that can affect our business, including factors that could cause actual results to differ materially from our forward looking statements are described in our most recent Form 10 K, Form 10 Qs and other filings with the Securities and Exchange Commission and in our earnings release for the fourth quarter and full year 2024. Our estimates or other forward looking statements might change and the company assumes no obligation to update forward looking statements to reflect actual results, change assumptions or other events that may occur except as required by law. Now let me turn it over Hassan. Hassan?

Thank you, Parag. Good morning, everyone, and thank you for joining us on the call. 2024 marked the fourth year of our transformation journey, transformation that began by focusing our efforts where we add value, intelligent power and sensing technologies. We've invested in differentiated products to win with disruptive innovation and the high growth megatrends of automotive and industrial and AI data centers. We've streamlined manufacturing through our FabRight strategy and we've improved our operational efficiencies in doing so.

Market conditions aside and I'll get to those, I'm proud of the hard work our worldwide teams continue to put in and I want to thank everyone for their tenacity amid what continues to be a very difficult environment. We remain committed to our winning formula and we have demonstrated the resilience in our business model delivering non GAAP gross margin of 45.5% against revenue of $7,100,000,000 for the full year. As for the market environment, demand declined late in the quarter and continued into January resulting in fourth quarter revenue of $1,720,000,000 non GAAP gross margin of 45.3% and non GAAP earnings per share of $0.95 Regional revenue declined sequentially except North America, which remained flat with Japan seeing the sharpest decline. Quarter on quarter declines were driven primarily by our non core market segments. Amid the backdrop of end market softness and geopolitical uncertainty, inventory digestion persists across our key end markets.

Our stance has not changed. We are prioritizing value and we will now play in highly volatile price sensitive markets. We are maintaining the integrity of our value proposition and positioning ourselves for profitable growth in the future. Our fourth quarter automotive revenue increased 8% sequentially driven by China followed by North America. Results were driven by share gains and new customer ramps.

China grew 18% quarter over quarter and while Q4 was up, an early Chinese New Year and extended shutdown period has already impacted January EV deliveries from the top China based automakers. Demand from all other region weakened towards the end of the fourth quarter, which continued into Q1. In The U. S, Tier 1s have been impacted by lower global auto demand than expected in the fourth quarter along with slower EV ramp than anticipated. Entering Q1, we expect persisting volatility due to the geopolitical uncertainty across all geographies as our customer assess their manufacturing footprints and the impact of tariffs.

We are monitoring the demand signals of EV adoption given the uncertainty around EV tax credits and slowing infrastructure deployment. In Europe, EV demand weakened in Q4 with new vehicle registrations dropping 10% month over month in December. Our industrial revenue decreased 5% sequentially with weakness in the traditional parts of the business. The PMI across all major regions remain weak and the slowdown in manufacturing activity that further compounded by ongoing inventory digestion and we expect the weakness to persist into 2025. Smaller but growing parts of the business that we don't break out are AI data center and aerospace and defense where revenue grew more than 4050% respectively in 2024 over 2023.

In silicon carbide, our fourth quarter revenue increased sequentially resulting in a 22% increase for the second half over the first half of twenty twenty four. For the full year, revenue declined slightly from 2023 as programs did not ramp at the expected levels. We remain focused on executing our strategy. We have delivered on our 200 millimeter technology development and sampled customers. We are balancing our internal versus external substrate supply and we are winning with the market movers by pushing the boundaries of innovation.

The performance of our silicon carbide enables us to deliver an optimized system performance while lowering the total cost of ownership to our customers without eroding the value of our solutions. In China, we continue to win based on performance and we expect to gain share in the silicon carbide TAM as the transition to 800 volt batteries continue. Furthering our strategy of delivering the complete power tree for automotive, industrial and AI data center, we closed the acquisition of Corvo's silicon carbide junction field effect transistor business. The SiC JFET portfolio complements our Elite SiC power solutions and is the most competitive technology to get the energy efficiency and power density and power supply units for AI data centers. It is a high voltage play in AI data centers and as power levels in these systems are nearly doubling, AC to DC conversion for UPS and PSUs is transitioning from silicon solutions to silicon carbide.

We expect JFET to continue to replace the incumbent superjunction technologies and PSUs as we need as the need for smaller footprint, better performance and lower cost continues to increase. In terms of silicon carbide, revenue growth and AI, design wins for the hyperscalers started to ramp in the fourth quarter and we expect our SiC JFET and SiC MOSFET revenue to continue to grow in 2025. The acquisition of this highly capable team and technology also accelerates our readiness for emerging markets such as EV battery disconnects and solid state circuit breakers. We expect this portfolio to unlock a $1,300,000,000 TAM opportunity with a 30% revenue CAGR through 02/1930. Despite the current environment, we remain committed to our long term strategic goals and we continue to invest in disruptive innovation to drive profitable growth and to emerge stronger from this downturn.

In November, we introduced the most advanced analog and mixed signal platform for intelligent power and sensing solutions. Our new Treo platform built on leading edge BCD, 65 nanometer technology for high performance and advanced features supports the industry's widest voltage range of one to 90 volts for unmatched integration. The Treo platform embodies our strategy of prioritizing high value products and will accelerate our portfolio proliferation to unlock a $36,000,000,000 TAM opportunity at up to 70% gross margins. The modular architecture of the platform is enabling us to sample products faster. This year, we will start to reap the benefits of the investments we've already made in the technology and capacity at our East Fishscale fab as we ramp up revenue and double the number of products available

market. Customer reaction has been very positive. They are taking advantage of the level of integration and accelerated time to market for applications such as Ethernet for automotive zonal architecture, ultrasonic sensing for ADAS park assist and high efficiency power management for AI data centers and they are actively designing Treo based devices into their next generation platforms. As we look ahead to 2025, visibility is very limited and customers are taking a wait and see approach in a backdrop of geopolitical uncertainty. We will continue to focus on what we can control.

We are taking this opportunity to review our portfolio and further rationalize based on the value we bring. We will optimize our manufacturing footprint to improve our cost structure and we will control spending by focusing on efficiency through automation while we continue to invest in R and D to support our long term growth. Our actions will position us to better benefit from a market recovery, while supporting our long term strategy. Let me now turn it over to Thad to give you more details on our results and approach going into 2025.

Thanks, Hassan. As Hassan mentioned, despite the downturn, our 2024 results demonstrate our team's relentless pursuit of operational excellence to drive cost efficiencies in a weak market environment. Their efforts allow us to maintain gross margin at 45.5% against revenue of $7,100,000,000 and to generate $1,200,000,000 of free cash flow, a 3x increase year over year. Our proactive approach to prudent cost management and capacity planning has proven to be the right strategy to deliver better results than the company has ever achieved in similar market conditions. Looking to 2025 and beyond, we believe rightsizing the organization will benefit the company in the long term.

These structural changes should position us to expand gross and operating margins and generate strong cash flow in the future. We are moving aggressively and with urgency on the following actions. We plan to further rationalize our manufacturing footprint and reduce excess capacity through our FabRight strategy. These actions will reduce our underutilization absorption as we lower our fixed cost structure. We expect to see the results of these actions to positively impact the income statement in late twenty twenty five and continue driving margin expansion towards our long term target by providing greater leverage in our business model as the market recovers.

We will make structural changes across the company to reduce our operating expenses. We are exploring a number of options, including rationalization of our product portfolio, headcount reductions and potential site closures. We expect to see a meaningful impact of these actions as early as the second quarter. We will continue R and D investments in differentiated high margin products to support our long term growth. And we will focus on free cash flow generation in 2025 as we manage working capital tightly and reduce capital spending to our revised intensity target of mid single digit percentage range in 2025.

We generated $422,000,000 of free cash flow in Q4, that's 39% sequential increased sequentially. We're committed to our long term target of returning 50% of free cash flow to shareholders through our share repurchase program. And in 2024, we exceeded it by returning 54% or approximately $650,000,000 This includes $200,000,000 of share repurchases in the fourth quarter and there is approximately $1,700,000,000 remaining on our repurchase authorization. Turning to revenue for the fourth quarter, a slowdown in demand across all end markets resulted in revenue of $1,720,000,000 Automotive and industrial accounted for 84% of revenue in the fourth quarter. Automotive revenue was $1,030,000,000 which increased 8% sequentially driven by programs that ramped in silicon carbide.

Revenue for industrial was $417,000,000 down 5% sequentially. Inventory digestion persists and we saw further degradation in the traditional parts of industrial offset by pockets of growth in medical. Outside of auto and industrial, our other business declined 24% quarter over quarter and more than was seasonally expected. We have seen early signs of pricing pressures in pockets of these non core end markets, which we will not pursue and exit over time if the volatility returns to historical levels. Looking at the fourth quarter split by the business units, revenue for the Power Solutions Group or PSG was $8.00 $9,000,000 a decrease of 2% quarter over quarter and 16% year over year.

Revenue for the analog and mixed signal group or AMG was $611,000,000 a decrease of 7% quarter over quarter and a decrease of 18% year over year. Revenue for the Intelligent Sensing Group or ISG was $3.00 $3,000,000 a 9% increase quarter over quarter. ISG revenue decreased 2% over the same quarter last year. Turning to gross margin in the fourth quarter, GAAP gross margin was 45.2 and non GAAP gross margin was 45.3%, down 20 basis points sequentially and 140 basis points from the quarter a year ago. Manufacturing utilization decreased to 59% in Q4 as we aggressively took action late in the quarter to match our demand visibility.

Now let me give you some additional numbers for your models. GAAP operating expenses for the fourth quarter were $371,000,000 as compared to $330,000,000 in the fourth quarter of twenty twenty three. Non GAAP operating expenses were $321,000,000 compared to $3.00 $6,000,000 in the quarter a year ago. Non GAAP operating expenses increased sequentially due to the timing of R and D project expenses. GAAP operating margin for the quarter was 23.7% and non GAAP operating margin was 26.7%.

Our GAAP tax rate was 14.2% and our non GAAP tax rate was 16%. Diluted GAAP earnings per share for the fourth quarter was $0.88 as compared to $1.28 in the quarter a year ago. Non GAAP earnings per share was $0.95 as compared to $1.25 in Q4 of twenty twenty three. GAAP diluted share count was $430,000,000 shares and our non GAAP diluted share count was $426,000,000 shares. Turning to the balance sheet, cash and short term investments was $3,000,000,000 with total liquidity of $4,100,000,000 including $1,100,000,000 undrawn on a revolver.

Cash from operations was $580,000,000 and free cash flow increased 39% sequentially to $422,000,000 representing 25% of revenue. For the year, we generated almost $1,200,000,000 of free cash flow. Capital expenditures during Q4 were $157,000,000 which equates to a capital intensity of 9%. Inventory was flat quarter over quarter on a dollar basis and increased by three days to two sixteen days. This includes one hundred days of bridge inventory to support fab transitions in silicon carbide.

We are nearing the completion of these strategic builds and expect this inventory to peak in the first half of twenty twenty five as we ship and convert the inventory to cash. Excluding the strategic builds, our base inventory is at one hundred and sixteen days, which continues to be within our target range of one hundred to one hundred and twenty days. Distribution inventory declined 55,000,000 with weeks of inventory remaining relatively flat at 9.6 versus 9.7 weeks in Q3. Our plan to change the mix in the channel to support the mass market has resulted in an 18% increase in customer count year over year. We expect distribution weeks of inventory to be plus or minus ten weeks going forward.

Looking forward, let me provide you the key elements of our non GAAP guidance for the first quarter. As a reminder, today's press release contains a table detailing our GAAP and non GAAP guidance. Given our visibility, we anticipate Q1 revenue will be in the range of $1,350,000,000 to $1,450,000,000 We expect non GAAP gross margin to be between 3941% with utilization declining to mid 50% in Q1. This includes share based compensation of $7,000,000 At the midpoint of our guidance, approximately half of the quarter on quarter change in gross margin is attributable to the drop in revenue as the under absorption is calculated on a lower revenue number. An additional 100 basis points is due to unfavorable product mix and the remainder is driven by lower utilization, which now drives a 20 to 25 basis points change in gross margin for every 100 basis points of utilization at these lower utilization levels.

This change is due to the higher fixed costs as a portion of total factory cost. As the market recovers and utilization improves, we will see significant leverage in our gross margin as these costs dissipate and we recognize the benefit of our fab right cost reductions. Moving on to non GAAP operating expenses, we expect OpEx to be in the range of $313,000,000 to $328,000,000 including share based compensation of $31,000,000 We anticipate our non GAAP other income to be a net benefit of $14,000,000 with our interest income exceeding interest expense. We expect our non GAAP tax rate to be approximately 16% and our non GAAP diluted share count is expected to be approximately $425,000,000 shares. This results in non GAAP earnings per share to be in the range of $0.45 to $0.55 We expect capital expenditures in the range of $110,000,000 to $150,000,000 As you can see, we are not standing still.

The structural changes we plan on making will position us to react quickly and favorably to changing market conditions. We believe electrification, AI data center and renewable energy are still the major growth drivers for our industry over the next decade and we remain confident our technology and innovations in these markets will allow us to capitalize on those trends. With that, I'll turn the call back over to Kevin to open it up for questions. Thank you.

Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Hi guys. Thanks for may ask a question. First question, I want to get into the structural versus cyclical side. You guys have been conservative for quite some time on a cyclical basis, probably one of the first ones. But yet the magnitude of this drop is very, very significant.

Hassan, I know you talked about late in the quarter things kind of fell apart from a demand perspective, but how much of this do you believe to be on specific versus the end market? And just from a revenue basis, are you at all concerned that the structural end market or product portfolio needs larger adjustment and isn't going to be as resilient as you hoped?

No. Look, I think the big change in the precipitous, the one thing I can say that is on specific is the non core business that has seen the largest decline. And we've been very consistent not to play in that volatility. If you recall, when we started the transformation, we had a big portion, call it $800,000,000 to $900,000,000 of non core business where we said we would exit. We only exited about half of that.

And we're seeing with that extended downturn, we're seeing more and more volatility in that pricing, but we remain consistent with our strategy that we're not going to play in this highly volatile and we're going to maintain the value of our core products, which is where we're investing. Think Treo, think silicon carbide, think in the medical and so on. All of these are where the growth is going to come from. And in the short term, as we see the volatility, we're not going to participate, yet we will choose to rationalize our portfolio further and match our capacity accordingly.

And Ross, I would add just to size the size of that business that Hassan is talking about the non core, it's roughly $350,000,000 to $400,000,000 that is more volatile that as this downturn extends that is we will exit over time, just to put a size into it.

Thanks for that, Thad. And then I guess along the lines of the sizing side of things, you talked about some of the structural actions you are going to take on the cost front as soon as 2Q and then some of the benefits potentially on the COGS side coming into the back half. Any sort of color as far as putting magnitudes around those?

No, not at this point. We're still working on the plans. We'll give updates throughout the quarter as we solidify those plans. So expect some updates as we go.

One moment for our next question. Our next question comes from Vivek Arya with Deutsche Bank of America Securities. Your line is open.

Thanks for taking my question. Just first kind of few clarifications. So Q1, what are you expecting for the sequential segment trends in automotive, industrial and other segments? And I think you mentioned something unfavorable in the mix. And then any early look at Q2 seasonality because Hassan, what everyone is obviously trying to guess is what is the path of recovery for on from here?

Yes. So by end market, Vivek, automotive is going to be down the most. We think that's going to be probably 25% or more down sequentially. When you look at industrial and other, we think it's going to be down mid to high single digit sequentially.

And look, it's too on the visibility side, we're sticking with visibility of about a quarter. Of course, we have some looks into Q2, but it's too early to talk about seasonality in Q2 given really the volatility and backdrop of between geopolitical and tariffs as early as over the weekend. So we're not going to be talking about Q2 yet as we get more and more visibility, we'll update them. But as far as recovery, look, I think I know what others have seen have said, it's a lot of the everybody's talking about, oh, the second half would be better than the first half and so on. It's the same string that everybody's pulling that they did in 2024.

I don't subscribe to that. I subscribe to the data I see and we're going to manage the company to the data we see, because getting it at this point will just be upside for us as the market recovers. And I'd rather have that and be right in that aspect versus hope for a recovery, run the company and if the recovery doesn't come, now you have a headwind. I'd rather all of that work that we do now like that sat not standing still to be tailwind for us whether there's a recovery or not.

And from my follow-up, Hassan, so if I look at Q1 automotive, I think you mentioned down 25%, so let's say 70 ish million or so, it is sort of reset back to mid-twenty two levels, but it is still well above the levels we saw pre COVID, right, which were in the $400,000,000 5 hundred million dollars quarterly range. What is the right baseline that we should have when we start to think about automotive business for long periods of time? Because we have seen industrial businesses get reset back to much lower levels, but automotive is still above the 2019 levels. It's closer to 22 levels. So how do you think about what is that right baseline?

When was automotive at the right baseline level for us to project it? What have been the effects of LTSAs pricing, content, EV, silicon carbide, etcetera, that will help us project what your automotive business can be over the next several years as you start to normalize? Thank you.

Yes. Look, I think from looking for it's hard to talk about a baseline given all the changes that we've done to our portfolio. And you mentioned some of them, the growth in silicon carbide, which is not just the growth in silicon carbide, but a mix shift even on the ASP side. Silicon carbide module is a much higher dollar content than some, for example, the discrete we used to ship more of prior. So from a unit, you can expect unit decline, but revenue went up.

So it's hard to get a baseline given how drastic our portfolio has shifted over the last even two to three years. But moving forward, our long term view, which remains consistent outside of the market environment today, our long term view remains consistent, which is SAR plus call it high to low teens sorry, from high single digit to low teens, that's the range over SAAR, so which is what we're seeing. That I would say is the baseline that we are building to and the baseline we are investing to, which is both a mix shift into higher value products, especially as for example, we start introducing Treo, which comes with a margin expansion as well towards our long term target. So moving forward, that's how you can think about it, but it's hard to go backwards and talk about a baseline just because of the shift that we've done over the last few years.

One moment for our next question. Our next question comes from Toshiya Hari with Goldman Sachs. Your line is open.

Hi, good morning. Thank you so much for taking the question. Hassan, I wanted to go back to the automotive outlook for Q1, down, call it, 25 sequentially. This outlook is much worse than many of your peers. I'm just curious what's driving the delta there.

Is it pricing? Is there a non core component within automotive? Any additional context or color there would be really helpful. Thank you.

Yes. So of course, there's a non core business component to it as I mentioned. So that's built into the first quarter, but some of it is the silicon carbide. We've always said silicon carbide quarter on quarter is lumpy. We've had a great second half.

However, in China, it's all driven by China. China today is looking at the softer Q1. I think that's temporary as it digest the inventory that they've built. It's not our inventory, but I'm talking about the vehicle inventory. We're monitoring that.

You have an early Chinese New Year. Some of the Chinese customers have done an extended shutdown in order to absorb that inventory. So net net, I don't worry about that quarter on quarter lumpiness as I look at it over a multi quarter period. We're still gaining share both in China and some of the European names. I've said it before, they're not ramping at the rate that we expected, but they're still ramping, which is what drove the second half of twenty twenty four.

So quarter on quarter, the number is what the visibility shows, but the structural changes in the business and the outlook remain unchanged.

That's helpful. Thank you. And then maybe one for Saad. You talked about rationalizing your portfolio. You talked about reviewing your manufacturing footprint.

As you draw up your forward strategy and your plans, is the aspiration to kind of hold on to the 2027 model that you guys shared with us a couple of years ago, I. E. Gross margins of 53%, operating margins of 40%? Or I mean, I realize the backdrop is very, very different at this point. So should we think about should we assume you guys are looking at sort of a different or updated long term model at this point?

No. Look, we still remain committed to that 53% target. If you look at the gross margin in the short term, it's all impacted by utilization, right? I talked about the moving pieces, but utilization is the largest headwind that we have right now. Assuming the market recovers and we continue to execute on our fab right.

We will right size our manufacturing to fit the size of the company here. And we don't need that top line revenue that was in that original target, but we do remain committed to that 53% gross margin target. If you look at the gross margin actions that we're taking now, it's primarily a lot of non cash actions, if you think about it. And it'll generate strong free cash flow as we think about this year and in 2026. And then obviously, as we go into 2027 and hit that target, we believe we'll hit that.

But even if you look at 2025 from a free cash flow standpoint, we believe we're going to hit that target model of free cash flow of 25% to 30% in 2025 for the year. We achieved it in Q4 of twenty twenty four with a 25% free cash flow margin and we believe we'll continue to generate strong free cash flow going forward.

One moment for our next question. Your next question comes from Christopher Danely with Citi. Your line is open.

Hey, thanks guys. I guess for the rest of the year, how would you expect the auto versus the industrial growth to trend? Do you expect auto to recover after Q1 or no visibility at all?

It's too early to talk about the rest of the year to

honest with you. We know what designs we have, we know what designs we're ramping. At this point, the shares have been gained, designs have been qualified. It's purely an end market demand right now.

Yes. And we do believe that we're still under shipping natural demand. So at some point you got to come back to that level. It's just a matter of when.

That's fair. And then a question on silicon carbide. With this decline, are you guys reassessing your long term targets in silicon carbide as far as growth or margins go?

No, not on the margin because you can think about it as a demand. So as far as growth is concerned, outside of the short term lumpiness and the volatility in really the EV, our long term growth, we aim to be the leaders in the market from a market share perspective and we aim to run the highest profitability silicon carbide business we have given the innovations that we believe we bring to the customer. So that remains unchanged. There will be some strategic reviews of the capacity, But overall, we're focused on that market and that will remain a tailwind for us both on growth and margin.

One moment for our next question. Our next question comes from Blayne Curtis with Jefferies. Your line is open.

Hey, thanks for taking my question. I had two. I was just kind of curious, I wanted to go back to the non strategic business, you said $3.50 or 400. Just how much of that is in terms of the guidance for March, are you planning on some of that delta coming out in March or is that something that would be on top of what you're seeing in March and would come out further in the year if you make those decisions?

Yes. Look, we think that if that business, if we do lose that business because of pricing, it'll happen over a multi quarter period. So it's not all baked into Q1. It's further out into the year. And like I said, that will really be market dependent at that point.

We'll keep that business if it's good margin like it has been historically. But if the pricing continues to drop, we'll just let it wither away over time.

ask, the auto demand by geography. You actually were up in December. A lot of people saw China strength. I think you called it out. I'm just kind of curious if you can just talk about March demand by geography in auto?

Yes. I think in general, we expect it to be down. I don't think we can call out relatively speaking, there are some regions that are better than others, but the growth that we've had was China, as I spoke about in my prepared remarks. And getting into Q1, I highlighted the early Chinese New Year and the extended shutdown. So that's again a demand environment.

We are in these sockets. We ramped in the fourth quarter as customers sell through their inventory, meaning the inventory of cars, not our inventory with them, but the cars. As that inventory sells through, they will replenish and we'll see the orders recover. So that's the uncertainty because it's purely a consumer confidence endgame. As we get better visibility after the Chinese New Year, we will be able to get more clarity on how the rest of the year will be.

One moment for our next question. Our next question comes from Joshua Buckhalter with TD Cowen. Your line is open.

Hey guys, thanks for taking my question. I also want to ask about the first quarter gross margin. So you walked through the 100 basis points of unfavorable mix and then the new rule of thumb adding probably 100 basis points to 150 basis points headwind as well. Can you sort of, I guess, provide more details on the remaining part of the sequential decline? And also, any more details you can give on what specifically is driving the unfavorable mix given it sounds like you're walking away from business as is?

Yes. So starting with the gross margin, if you do the walk from Q4 to the midpoint of our guidance in Q1, and I said this in our prepared statement here, The half of it, roughly half of that decline is a calculation change in the under absorption. So if you think about the under absorption on a lower revenue number, that's driving half of that margin delta right there. There's 100 basis points from the unfavorable product mix. And then there's you do the math, it's roughly about 150 basis points from the under utilization as we drop utilization down further.

The mix is just purely a product mix. If you think about the long tail of customers that we talk about in some of that some of these businesses, that's what is remaining soft, some of this industrial soft. So it's purely just a product mix unfavorability kind of in the short term here. We believe that over the long term that will come back as well. So if you think about, whenever there's a recovery and revenue comes back, you will get that half of that delta just with the revenue increase because it's a pure calculation.

Yes. Thank you, Thad. And then for my follow-up, you mentioned sort of inventory levels coming down at your auto Tier one customers. Any metrics you can give us on how much inventory you expect to be able to strip out downstream at your Tier 1s and where levels, I guess, are now and where you expect them to be exiting the first quarter? Thank you.

Yes. Look, it's not really an industry response because every Tier one depending on their financial and the strength of their balance sheet are taking a different approach to inventory. It's hard to get 100% visibility there. I mean, we work with customers as we see orders. Our priority is depleting.

So we're not pushing inventory out. That's why Sanath mentioned, we believe we are well under shipping demand at some point that will recover. However, the inventory levels at our customers really directly correlated to what the demand is. And as demand deteriorated, inventory looks elevated and they will keep taking action. So it's kind of a moving target, but it is not industry specific.

We have some Tier 1s we work with that have already achieved it. So we're already shipping through demand. But in general, there's still a lot of inventory digestion across the industry.

One moment for our next question. Our next question comes from Vijay Rakesh with Mizuho. Your line is open.

Yes. Hi, Hassan and Ted. Just wondering, when you look at the fab utilization, how that should play out over the next couple of quarters, I guess, 1Q, like do you see that flat or maybe second half picking up or is there some trend?

Well, look, utilization is all going to be demand driven, right? We said that in Q1, our utilization will drop to the mid-fifty percent range from 59% here in Q4. So we've already taken that action. For what we can see right now, we'll kind of be running in that range plus or minus until we see demand recovery. Once we see the demand recovery, utilization will go up and then there's the natural latency until you see gross margin improvement.

But that'll happen when we see the demand the market recover.

Got it. And in terms of the silicon carbide outlook, I think you said might be up year on year. Just wondering if any color around that and the backlog, how that's trending there as well? Thanks.

The only comment I made is we're designed in. We gained the share. We saw that in the strength getting into the second half of twenty twenty four. At this moment, 2025 is purely a demand. We're gaining share across all major customers.

But at this point in time, it is what they will end up achieving from, call it, EV vehicle sales, we will ramp accordingly. But we're in a very good position with the customers. It's purely an end demand commentary.

ON Semiconductor (ON) Q4 2024 Earnings Call Transcript

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